US Dollar flattens as Powell smashes hopes of quick interest-rate cuts
- The US Dollar trades flat, looking for direction after the Federal Reserve decision.
- Powell kept his cards close to his chest, not committing to any path for interest rates.
- The US Dollar index trades in the middle of a 30-day range between 104.00 and 105.50.
The US Dollar (USD) trades overall in the green against most peers on Thursday, posting only slight gains, making the US Dollar Index (DXY) trade in a very narrow range. The devaluation of the Greenback seen on Wednesday after the disinflationary Consumer Price Index (CPI) numbers got partially erased by the US Federal Reserve (Fed) rate decision and its dot plot. Federal Open Market Committee (FOMC) members only see reason for one rate cut in 2024, and four in 2025, while markets were expecting two rate cuts for this year.
Fed Chairman Powell left markets rather clueless as he didn’t commit to any path for interest rates.. This means markets are likely to respond to upcoming data, and with the Producer Price Index (PPI) numbers on the docket, together with the weekly Jobless Claims, any soft number will be enough to trigger US Dollar easing. Similarly, upbeat economic data points will move the needle in favour of a stronger Greenback, making it a bumpy ride until that possible first interest-rate cut in September.
Daily digest market movers: Focus returns to data
- At 12:30 GMT, the weekly Jobless Claims and the Producer Price Index numbers will be released:
- Weekly jobless claims for the last week of May:
- Initial claims are expected to subside a little to 225,000 from 229,000.
- Continuing Jobless Claims should pick up to 1.800 million from 1.792 million.
- May’s Producer Price Index numbers:
- Monthly headline PPI is seen advancing by a marginal 0.1%, easing from the 0.5% increase seen in April. On year, headline PPI is seen rising to 2.5% from 2.2% .
- Monthly core PPI should ease as well to 0.3% from 0.5%. Yearly core PPI should remain stable at 2.4%.
- Weekly jobless claims for the last week of May:
- Federal Reserve Bank of New York President John Williams will be the first Fed speaker to come out of the blackout period that takes place during a Fed rate decision. Williams will participate in a moderated discussion at around 16:00 GMT with US Treasury Secretary Janet Yellen at the Economic Club of New York.
- Equities do not like to be left behind clueless by the Fed, with both Asian and European indexes trading in the red. US futures are up though, with a small exception for the Dow Jones Industrial Index.
- The CME FedWatch Tool shows a 38.5% chance of Fed interest rate at the current level in September. Odds for a 25-basis-points rate cut stand at 56.7%, while a very slim 4.8% chance is priced in for a 50-basis-points rate cut.
- The benchmark 10-year US Treasury Note slides to the lowest level for this month, near 4.31%.
US Dollar Index Technical Analysis: Nobody knows
The US Dollar Index (DXY) faces the consequences of an eventful Wednesday that brought a disinflationary inflation report and a Fed rate decision that clouded the outlook. With the Fed not committing to any plan ahead, any softer data point this summer will contribute to a further easing for the Greenback. In case US data keeps easing, a weaker USD can be expected in the next few months.
On the upside, no big changes to the levels traders need to watch out for. The first is 105.52, a level that held during most of April. The next level to watch is 105.88, which triggered a rejection at the start of May and will likely play its role as resistance again. Further up, the biggest challenge remains at 106.51, the year-to-date high from April 16.
On the downside, the trifecta of Simple Moving Averages (SMA) is still playing support. First, and very close, is the 55-day SMA at 105.07. A touch lower, near 104.48, both the 100-day and the 200-day SMA are forming a double layer of protection to support any declines. Should this area be broken, look for 104.00 to salvage the situation.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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